India's real GDP growth is influenced by both the increase in overall economic output (higher nominal GDP) and the reduction in the rate of price increases (lower inflation)....

India's 7.4% real GDP growth in the Q4 of FY25 is primarily due to higher real GDP growth, not necessarily lower inflation. The 7.4% growth reflects an increase in the quantity and value of goods and services produced, not just a decrease in the cost of those goods and services, according to a Moneycontrol article. While lower inflation can contribute to a higher real GDP growth rate, the data indicates that the growth is driven by increased production, particularly in sectors like manufacturing, construction, and financial services.

Elaboration:

Real GDP Growth:

The 7.4% figure represents a real GDP growth rate, meaning it's adjusted for inflation. It reflects the actual increase in the production of goods and services in the economy.

Sectoral Growth:

The growth is being driven by specific sectors like manufacturing, construction, and financial services, with manufacturing experiencing a three-quarter high and construction a double-digit growth rate, according to the Indian Express.

Lower Inflation's Role:

While lower inflation is positive, it doesn't directly translate into the 7.4% growth. It means that the same amount of goods and services are being produced but at a lower cost, which can be a positive factor in overall economic growth, according to Business Standard.

Nominal vs. Real GDP:

Nominal GDP, which is not adjusted for inflation, showed an even larger increase (9.8%) for FY2024-25, which further supports the idea that the growth is due to increased production rather than just lower inflation, according to the Times of India.

1. Real GDP and its Impact:

Real GDP Growth:

A 7.4% real GDP growth means that the total value of goods and services produced in an economy has increased by 7%, adjusted for inflation. This indicates a healthier economy with greater potential for production and consumption.

Increased Production:

This growth is reflected in increased output across various sectors, including manufacturing, agriculture, and services. For example, in Gorakhpur, Uttar Pradesh, more rice, wheat, or manufactured goods might be produced, leading to greater economic activity.

Example:

Imagine a factory producing 100,000 units of a product last year. A 7% real GDP growth could mean they are now producing 107,000 units, indicating a higher level of production.

2. Lower Inflation and its Impact:

Stable Prices:

Lower inflation means that the prices of goods and services are rising at a slower rate, if at all. This ensures that the value of money (purchasing power) is more stable.

Increased Purchasing Power:

With low inflation, consumers can buy more with their income. For example, if a consumer's income increases by 7% due to real GDP growth, they can purchase 7% more goods and services if inflation remains low.

Example:

A farmer in Gorakhpur can sell more of their produce at a higher price due to real GDP growth. If inflation is low, they can purchase more inputs for their farm (like seeds, fertilizers) with the increased income, leading to further production.

3. Combined Effect:

Increased Disposable Income:

Low inflation allows consumers to spend more of their income on discretionary goods and services. This can lead to increased demand, further stimulating economic growth.

Business Investment:

Businesses are more likely to invest in new equipment and facilities when they see a stable and growing market. This investment further contributes to GDP growth and job creation.

Example:

A small business owner in Gorakhpur can reinvest profits from increased sales into upgrading their store or hiring more employees, leading to higher productivity and output.

4. Real vs. Nominal GDP:

Real GDP:

Measures economic growth in terms of the quantity of goods and services produced, adjusted for changes in prices. This provides a more accurate picture of economic progress than nominal GDP.

Nominal GDP:

Measures the value of goods and services produced using current market prices, without adjusting for inflation. Nominal GDP can be misleading during periods of high inflation.

Example:

If nominal GDP grows by 10% but inflation is 3%, then the real GDP growth is only 7% (10% - 3%).

5. Numerical Example:

Let's say a household's income increases by 7% due to real GDP growth.

If inflation is 2%, the household's real income (purchasing power) increases by 5% (7% - 2%).

This means they can afford more of the same goods and services, or they can buy a higher quality of goods and services with the same budget.

Here's a breakdown:

1. Higher Nominal GDP:

A higher nominal GDP (GDP at current prices) reflects an increase in the total value of goods and services produced in the economy. This includes both an increase in the physical volume of production and an increase in prices. In FY24, India's nominal GDP grew by 9.9% according to the PIB.

2. Lower Inflation:

Lower inflation means that prices are rising at a slower rate, or even falling. This allows consumers and businesses to purchase more goods and services with the same amount of money. The PIB reported that average retail inflation eased to 4.9% in FY24-25.

3. Real GDP Growth:

Real GDP growth is calculated by adjusting nominal GDP for inflation. It provides a more accurate picture of the increase in the volume of goods and services produced, excluding the impact of price changes. In FY24, India's real GDP grew by 6.5%.

In essence, the real GDP growth rate represents the "true" economic expansion, while nominal GDP reflects the total value, and inflation affects how much that value is actually worth.

To answer your specific question:

India's real GDP growth rate owes to both higher GDP and lower inflation.

The exact contribution of each factor is difficult to pinpoint, but the decline in inflation has helped to ensure that the growth in real terms is more substantial than it would have been without it.

The Economic Survey projects a real GDP growth of 6.5-7% in FY25.

The PIB reports that inflation is expected to decline in FY25-26. businesses and consumers.

In summary, a higher real GDP signifies economic growth, primarily driven by increased production. When coupled with low inflation, this growth translates into increased purchasing power for consumers and businesses. A hypothetical scenario illustrates this: if real GDP grows by 7% and inflation remains low, a consumer can buy more goods and services with the same amount of money compared to a scenario with high inflation.  a 7% real GDP growth, coupled with low inflation, creates a virtuous cycle of increased production, stable purchasing power, and higher demand, ultimately benefiting both India's real GDP growth is influenced by both the increase in overall economic output (higher nominal GDP) and the reduction in the rate of price increases (lower inflation). The actual percentage contribution of each factor is difficult to quantify precisely, as they are intertwined. India's real GDP growth rate is the measure of the increase in the value of goods and services produced in the country after adjusting for inflation.